SPIRIT AIRLINES, INC. You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this annual report. Our discussion and analysis of fiscal year 2019 compared to fiscal year 2018 is included herein. Unless expressly stated otherwise, for discussion and analysis of fiscal year 2017 items and fiscal year 2018 compared to fiscal year 2017, please refer to Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 , which was filed with theUnited States Securities and Exchange Commission onFebruary 13, 2019 and is incorporated herein by reference. 2019 Year in Review The year 2019 marks our thirteenth consecutive year of profitability. In 2019, we increased our capacity by 14.5%, as we grew our fleet of Airbus single-aisle aircraft from 128 to 145 aircraft, launched service to 54 new markets and added 7 new destinations:Austin, Texas ;Nashville, Tennessee ;Burbank, California ;Charlotte -Douglas,North Carolina ;Indianapolis, Indiana ;Raleigh-Durham, North Carolina ;Sacramento, California . During 2019, we earned net income of$335.3 million ($4.89 per share, diluted), compared to net income of$155.7 million ($2.28 per share, diluted) in 2018. The increase in earnings was primarily driven by a 15.1% increase in our traffic and a 0.2% increase in average yield, year over year. In addition, we recorded special charges in 2018 that contributed to the increase in earnings year over year. During 2018, we recorded$90.4 million in special charges, non-operating and$88.9 million in special charges, operating. Refer to "Notes to the Financial Statements-4. Special Charges" for additional information. For the year endedDecember 31, 2019 , we achieved an operating profit margin of 13.1% on$3,830.5 million in operating revenues. Our traffic grew by 15.1% as we continued to address our value-conscious customers with ultra-low fares. Our operating yield increased by 0.2%, year over year. TRASM in 2019 was9.17 cents , an increase of 0.8% compared to the prior year. However, total revenue per passenger flight segment decreased 2.2%, year over year, from$113.37 to$110.91 reflecting a shorter average stage length, as compared to the prior year period. Fare revenue per passenger flight segment decreased 6.0% partially offset by a 1.9% increase in non-ticket revenue per passenger flight segment, as compared to the prior year. In addition to the stage length, the decrease in fare revenue per passenger flight segment was driven by lower fares and competitive pricing during the period. The increase in non-ticket revenue per passenger flight segment was primarily attributable to higher passenger usage fee, higher seat revenue and higher bag revenue per passenger flight segment, as compared to the prior year. Our operating cost structure is a primary area of focus and is at the core of our ULCC business model. Our unit operating costs continue to be among the lowest of any airline inthe United States . During 2019, our adjusted CASM ex-fuel increased by 4.7% to5.55 cents . The increase on a per-ASM basis was primarily due to increases in other operating expense per ASM, salaries, wages and benefits expense per ASM and depreciation and amortization expense per ASM. During 2019, we took delivery of 4 new aircraft financed under secured debt arrangements, 6 aircraft under sale-leaseback transactions and 7 aircraft under direct operating leases. In addition, we purchased 5 previously leased aircraft. In addition, we took delivery of 4 engines through cash purchases and purchased 2 previously leased engines. As ofDecember 31, 2019 , our 145 Airbus A320-family aircraft fleet was comprised of 31 A319ceos, 64 A320ceos, 20 A320neos and 30 A321ceos of which 64 aircraft are financed through secured debt, 52 are financed under operating leases, 2 are financed under finance leases, and 27 are unencumbered. As ofDecember 31, 2019 , our aircraft orders consisted of 147 A320 family aircraft scheduled for delivery through 2027. Operating Revenues Our operating revenues are comprised of passenger revenues and other revenues. Passenger revenues Fare revenues. Tickets sold are initially deferred within air traffic liability on the Company's balance sheet. Passenger fare revenues are recognized at time of departure when transportation is provided. All tickets sold by the Company are nonrefundable. An unused ticket expires at the date of scheduled travel and is recognized as revenue at the date of scheduled travel. Passenger revenues reported prior to the adoption of ASU 2014-09 are now reported as fare revenues within passenger 39 -------------------------------------------------------------------------------- revenues in our disaggregated revenue table within "Notes to the Financial Statements- 3. Revenue Disaggregation." Non-fare revenues. Our most significant non-fare revenues include revenues generated from air travel-related services paid for baggage, passenger usage fees, advance seat selection, itinerary changes, and loyalty programs. The adoption of ASU 2014-09 impacted the classification of these ancillary items since they are deemed part of the single performance obligation of providing passenger transportation. These ancillary items are now recognized in non-fare revenues within passenger revenues in our disaggregated revenue table within "Notes to the Financial Statements- 3. Revenue Disaggregation." The majority of our passenger non-fare revenues are recognized at time of departure when transportation is provided. Passenger revenues are recognized once the related flight departs. Accordingly, the value of tickets and non-fare revenues sold in advance of travel is included under our current liabilities as "air traffic liability," or ATL, until the related air travel is provided. Revenue generated from the FREESPIRIT credit card affinity program and other loyalty programs are recognized in accordance with the criteria as set forth in Accounting Standards Update ASU 2014-09.
Other revenues
Other revenues primarily consist of the marketing component of the sale of frequent flyer miles to our credit card partner and commissions revenue from the sale of various items such as hotels and rental cars.
Substantially all of our revenues are denominated inU.S. dollars. We recognize revenues net of certain taxes and airport passenger fees, which are collected by us on behalf of airports and governmental agencies and remitted to the applicable governmental entity or airport on a periodic basis. These taxes and fees includeU.S. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and departure taxes. These items are collected from customers at the time they purchase their tickets, but are not included in our revenues. Upon collection from the customer, we record a liability within other current liabilities on our balance sheets and relieve the liability when payments are remitted to the applicable governmental agency or airport. Operating Expenses Our operating expenses consist of the following line items. Aircraft Fuel. Aircraft fuel expense includes the cost of jet fuel, related federal taxes, fueling into-plane fees and transportation fees. It also includes realized and unrealized gains and losses arising from activity on our fuel derivatives, if any. Salaries, Wages and Benefits. Salaries, wages and benefits expense includes the salaries, hourly wages, bonuses and equity compensation paid to employees for their services, as well as the related expenses associated with employee benefit plans and employer payroll taxes. Landing Fees and Other Rents. Landing fees and other rents include both fixed and variable facilities expenses, such as the fees charged by airports for the use or lease of airport facilities, overfly fees paid to other countries and the monthly rent paid for our headquarters facility. Depreciation and Amortization. Depreciation and amortization expense includes the depreciation of fixed assets we own and leasehold improvements. It also includes the amortization of capitalized software costs and heavy maintenance. Under the deferral method, the cost of our heavy maintenance is capitalized and amortized on a straight-line or usage basis until the earlier of the next estimated heavy maintenance event or the remaining lease term. Aircraft Rent. Aircraft rent expense consists of all minimum lease payments under the terms of our aircraft and spare engine lease agreements recognized on a straight-line basis. Aircraft rent expense also includes supplemental rent. Supplemental rent is made up of maintenance reserves paid to aircraft lessors in advance of the performance of major maintenance activities that are not probable of being reimbursed and probable and estimable return condition obligations. Prior to the adoption of Topic 842 that became effective for the Company onJanuary 1, 2019 , aircraft rent expense was net of the amortization of gains and losses on sale leaseback transactions on our flight equipment. Refer to "Notes to the Financial Statements-14. Leases and Prepaid Maintenance Deposits" for information regarding the Company's accounting policy on sale-leaseback transactions after the adoption of Topic 842. As ofDecember 31, 2019 , 52 of our 145 aircraft and 9 of our 23 spare engines are financed under operating leases. 40 -------------------------------------------------------------------------------- Distribution. Distribution expense includes all of our direct costs, including the cost of web support, our third-party call center, travel agent commissions and related GDS fees and credit card transaction fees, associated with the sale of our tickets and other products and services. Maintenance, Materials and Repairs. Maintenance, materials and repairs expense includes parts, materials, repairs and fees for repairs performed by third-party vendors and in-house mechanics required to maintain our fleet. It excludes direct labor cost related to our own mechanics, which is included under salaries, wages and benefits. It also excludes the amortization of heavy maintenance expenses, which we defer under the deferral method of accounting and amortize as a component of depreciation and amortization expense. Loss on Disposal of Assets. Loss on disposal of assets includes the net losses on the disposal of our fixed assets. In addition, subsequent to the adoption of Topic 842 that became effective for the Company onJanuary 1, 2019 , it includes net losses or gains resulting from our aircraft and engine sale-leaseback transactions. Special Charges. Special charges include lease termination charges, ratification incentive payouts related to the new collective bargaining agreements with our pilots and dispatchers and the write-off of aircraft related credits. Other Operating Expenses. Other operating expenses include airport operations expense and fees charged by third-party vendors for ground handling services and food and liquor supply service expenses, passenger re-accommodation expense, the cost of passenger liability and aircraft hull insurance, all other insurance policies except for employee related insurance, travel and training expenses for crews and ground personnel, professional fees, personal property taxes and all other administrative and operational overhead expenses. No individual item included in this category represented more than 5% of our total operating expenses. Other (Income) Expense Interest Expense. Interest expense in 2019 and 2018 was primarily related to the financing of purchased aircraft. Capitalized Interest. The Company capitalizes the interest that is primarily attributable to the outstanding PDP balances as a percentage of the related debt on which interest is incurred. Capitalized interest represents interest cost incurred during the acquisition period of a long-term asset and is the amount which theoretically could have been avoided had we not paid PDPs for the related aircraft or engines. Capitalization of interest ceases when the asset is ready for service. Capitalized interest for 2019 and 2018 primarily related to the interest incurred on long-term debt. Interest Income. For 2019, interest income represents interest income earned on cash, cash equivalents and short-term investments. For 2018, interest income represents interest income earned on cash, cash equivalents, short-term investments and on funds required to be held in escrow in accordance with the terms of our Series 2017-1 EETC. Other Expense. Other expense primarily includes realized gains and losses related to foreign currency transactions. Special Charges, Non-operating. We had no special charges, non-operating in 2019. For 2018, special charges, non-operating represents interest related to an aircraft purchase agreement for the acquisition of 14 A319 aircraft previously operated under operating leases. The contract was deemed a lease modification which resulted in a change of classification from operating leases to finance leases, until the purchase date of the aircraft. Please see "Notes to Financial Statements-4. Special Charges" for further discussion. Income Taxes We account for income taxes using the asset and liability method. We record a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. In assessing the realizability of the deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will be realized. In evaluating the ability to utilize our deferred tax assets, we consider all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. Trends and Uncertainties Affecting Our Business We believe our operating and business performance is driven by various factors affecting airlines and their markets, trends affecting the broader travel industry and trends affecting the specific markets and customer base that we target. The following key factors may affect our future performance. 41 -------------------------------------------------------------------------------- Ability to Execute our Growth Strategy. Over recent years, we have pursued a high-growth strategy, which we expect to continue. Execution of such a strategy requires us to effectively deploy new flying into our network, as new routes or increased frequency of existing routes develop. New flying may not perform as well as expected or may result in a competitive reaction. Moreover, our growth strategy depends on the timely delivery of aircraft and engines in accordance with the intended delivery schedule in accordance with the applicable agreement. Delivery delays, as we have experienced from time to time in recent years, may cause us to scale back our growth, unless we are able to replace delayed aircraft in the secondary market or otherwise. Finally, our growth strategy relies in part on our ability to obtain additional facilities in airports, some of which are constrained, as well as additional flight crew, maintenance, and other personnel. We expect to experience an increase in our compensation expense to attract and retain qualified personnel. Ability to Maintain or Grow Capacity. We pursue a high-growth strategy that expands revenue and maintains lower cost due to economies of scale and lower initial expense for aircraft and labor. Execution of such a strategy depends on the ability to maintain efficient utilization of existing capacity and the timely delivery of new aircraft and engines. In recent years, we have experienced aircraft operational reliability and delivery delays particularly regarding our A320neo aircraft. The new generation aircraft provide fuel burn and other efficiencies, as compared to the older A320ceo aircraft, and the ability to serve additional markets with greater operating range. However, ongoing or expanded reliability and delivery issues could materially impact our operations, costs and net results. Competition. The airline industry is highly competitive. The principal competitive factors in the airline industry are fare pricing, total price, flight schedules, aircraft type, passenger amenities, number of routes served from a city, customer service, safety record, reputation, code-sharing relationships, frequent flyer programs and redemption opportunities. Price competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, target promotions and frequent flyer initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods in efforts to maximize unit revenue. The prevalence of discount fares can be particularly acute when a competitor has excess capacity that it is under financial pressure to sell. Beginning in 2015, and continuing into 2019, the airline industry saw greater and more persistent price discounting than in the preceding several years. In addition, significant airline capacity increases in certain major cities exerted strong downward price pressure in those markets. Finally, beginning in mid-2015 network carriers began matching low-cost carrier and ULCC pricing on portions of their marginal unsold capacity, particularly in their key hub markets. We expect the discounting trend to continue for the foreseeable future. Moreover, the network carriers have developed a fare-class pricing approach, in which a portion of available seats may be sold at or near ULCC prices, but without most product features available to their passengers paying at higher fare levels on the same flight. Broad fare discounting may have the effect of diluting the profitability of revenues of high-cost carriers but the fare-class approach may allow network carriers to continue offering a competitive price to ULCCs on some flights or routes, while maintaining higher pricing to their traditional constituencies of corporate and less price-sensitive travelers. Refer to "Risk Factors-Risks Related to Our Industry-We operate in an extremely competitive industry." Seasonality and Volatility. Our results of operations for any interim period are not necessarily indicative of those for the entire year because the air transportation business is subject to significant seasonal fluctuations. We generally expect demand to be greater in the second and third quarters compared to the rest of the year. The air transportation business is also volatile and highly affected by economic cycles and trends. Consumer confidence and discretionary spending, fear of terrorism or war, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, changes in governmental regulations on taxes and fees, weather and other factors have resulted in significant fluctuations in revenues and results of operations in the past. We believe demand for business travel historically has been more sensitive to economic pressures than demand for low-price travel. Finally, a significant portion of our operations are concentrated in markets such asSouth Florida , theCaribbean ,Latin America and the Northeast and northern Midwest regions ofthe United States , which are particularly vulnerable to weather, airport traffic constraints and other delays. Aircraft Fuel. Fuel costs represents one of our largest operating expenses, as it does for most airlines. Fuel costs have been subject to wide price fluctuations in recent years. Fuel availability and pricing are also subject to refining capacity, periods of market surplus and shortage and demand for heating oil, gasoline and other petroleum products, as well as meteorological, economic and political factors and events occurring throughout the world, which we can neither control nor accurately predict. We source a significant portion of our fuel from refining resources located in the southeastUnited States , particularly facilities adjacent to theGulf of Mexico .Gulf Coast fuel is subject to volatility and supply disruptions, particularly in hurricane season when refinery shutdowns have occurred, or when the threat of weather-related disruptions has causedGulf Coast fuel prices to spike above other regional sources. Our fuel hedging practices are dependent upon many factors, including our assessment of market conditions for fuel, our access to the capital necessary to support margin requirements, the pricing of hedges and other derivative products in the market, our overall appetite for risk and applicable regulatory policies. As ofDecember 31, 2019 , we 42 -------------------------------------------------------------------------------- had no outstanding jet fuel derivatives and we have not engaged in fuel derivative activity since 2015. As ofDecember 31, 2019 , we purchased a majority of our aircraft fuel under a single fuel service contract. The cost and future availability of jet fuel cannot be predicted with any degree of certainty. Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements, or CBAs. Relations between air carriers and labor unions inthe United States are governed by the RLA. Under the RLA, CBAs generally contain "amendable dates" rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the NMB. This process continues until either the parties have reached agreement on a new CBA, or the parties have been released to "self-help" by the NMB. In most circumstances, the RLA prohibits strikes; however, after release by the NMB, carriers and unions are free to engage in self-help measures such as strikes and lockouts. We have five union-represented employee groups comprising approximately 81% of our employees atDecember 31, 2019 . Our pilots are represented by theAir Line Pilots Association , International, or ALPA, our flight attendants are represented by theAssociation of Flight Attendants , or AFA-CWA, our dispatchers are represented by theProfessional Airline Flight Control Association , or PAFCA, our ramp service agents are represented by theInternational Association of Machinists and Aerospace Workers , or IAMAW, and our passenger service agents are represented by theTransport Workers Union , or TWU. Conflicts between airlines and their unions can lead to work slowdowns or stoppages. During 2017, we experienced operational disruption from pilot-related work action which adversely impacted our results. We obtained a temporary restraining order to enjoin further illegal labor action. InJanuary 2018 , under the guidance of the NMB assigned mediators, the parties reached a tentative agreement and inFebruary 2018 , the pilot group voted to approve the current five-year agreement with the Company. In connection with this agreement, we incurred a one-time ratification incentive of$80.2 million , including payroll taxes, and an$8.5 million adjustment related to other contractual provisions. These amounts were recorded in special charges within operating expenses in the statement of operations for the year endedDecember 31, 2018 . For further information, refer to "Notes to the Financial Statements-4. Special Charges." InMarch 2016 , with the help of the NMB, we reached a tentative agreement for a five-year contract with our flight attendants. InMay 2016 , the flight attendants voted to approve the new five-year contract with the Company. Our dispatchers are represented by the PAFCA. InJune 2018 , we commenced negotiations with PAFCA for an amended agreement with our dispatchers. InOctober 2018 , we reached a tentative agreement for a new five-year agreement with our dispatchers, which was ratified by the PAFCA members inOctober 2018 . InJuly 2014 , certain ramp service agents directly employed by the Company voted to be represented by the IAMAW. InMay 2015 , we entered into a five-year interim collective bargaining agreement with the IAMAW, covering material economic terms. InJune 2016 , with the help of the IAMAW, we reached an agreement on the remaining terms of the collective bargaining agreement, which is amendable inJune 2020 . Our passenger service agents are represented by the TWU, but the representation applies only to the Fort Lauderdale station where we have direct employees in the passenger service classification. We began meeting with the TWU in lateOctober 2018 to negotiate an initial collective bargaining agreement. As ofDecember 31, 2019 , we continued to negotiate with the TWU. We believe the five-year term of our CBAs is valuable in providing stability to our labor costs and provide us with competitive labor costs compared to otherU.S. -based low-cost carriers. If we are unable to reach agreement with any of our unionized work groups in current or future negotiations regarding the terms of their CBAs, we may be subject to work interruptions or stoppages, such as the strike by our pilots inJune 2010 . A strike or other significant labor dispute with our unionized employees is likely to adversely affect our ability to conduct business. Any agreement we do reach could increase our labor and related expenses. In 2010, the Patient Protection and Affordable Care Act was passed into law. Under the current administration, this law may be repealed in its entirety or certain aspects may be changed or replaced. If the law is repealed or modified or if new legislation is passed, such action could potentially increase our operating costs, with healthcare costs increasing at a higher rate than our employee headcount. Maintenance Expense. Maintenance expense grew through 2019 and 2018 mainly as a result of a growing fleet and the gradual increase of required maintenance for the older aircraft in our fleet. As the fleet ages, we expect that maintenance costs will increase in absolute terms. The amount of total maintenance costs and related amortization of heavy maintenance (included in depreciation and amortization expense) is subject to many variables such as future utilization rates, average stage length, the 43 -------------------------------------------------------------------------------- interval between heavy maintenance events, the size and makeup of the fleet in future periods and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify future maintenance expenses for any significant period of time. However, we believe, based on our scheduled maintenance events, maintenance expense and maintenance-related amortization expense in 2020 will be approximately$266 million . In addition, we expect to capitalize approximately$100 million of costs for heavy maintenance during 2020. As a result of a majority of our fleet being acquired over a relatively short period of time, heavy maintenance scheduled on certain aircraft will overlap, meaning we will incur our most expensive scheduled maintenance obligations on certain aircraft at roughly the same time. These more significant maintenance activities will result in out-of-service periods during which our aircraft will be dedicated to maintenance activities and unavailable to fly revenue service. When accounting for maintenance expense under the deferral method, heavy maintenance is amortized over the shorter of either the remaining lease term or the next estimated heavy maintenance event. As a result, deferred maintenance events occurring closer to the end of the lease term will generally have shorter amortization periods than those occurring earlier in the lease term. This will create higher depreciation and amortization expense specific to any aircraft related to heavy maintenance during the final years of the lease as compared to earlier periods. Maintenance Reserve Obligations. The terms of some of our aircraft lease agreements require us to post deposits for future maintenance, also known as maintenance reserves, to the lessor in advance of and as collateral for the performance of major maintenance events, resulting in our recording significant prepaid deposits on our balance sheet. As a result, the cash costs of scheduled major maintenance events are paid in advance of the recognition of the maintenance event in our results of operations. Critical Accounting Policies and Estimates The following discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements. For a detailed discussion of our significant accounting policies, refer to "Notes to Financial Statements-1. Summary of Significant Accounting Policies." Critical accounting policies are defined as those policies that reflect significant judgments or estimates about matters both inherently uncertain and material to our financial condition or results of operations. Loyalty Mileage Credits earned with Co-branded credit card. Customers may earn mileage credits based on their spending with our co-branded credit card company with which we have an agreement to sell mileage credits. The contract to sell mileage credits under this agreement has multiple performance obligations. The agreement provides for joint marketing and we account for this agreement consistently with the accounting method that allocates the consideration received to the individual products and services delivered. The value is allocated based on the relative selling prices of those products and services, which generally consists of (i) travel miles to be awarded, (ii) licensing of brand and access to member lists and (iii) advertising and marketing efforts. We determined the best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) ETV for the award travel obligation, (3) licensing of brand and access to member lists and (4) advertising and marketing efforts. We defer the amount for award travel obligation as part of loyalty deferred revenue within air traffic liability on the balance sheet and recognize loyalty travel awards in passenger revenue as the mileage credits are used for travel. Revenue allocated to the remaining performance obligations, primarily marketing components, is recorded in other revenue as miles are delivered. During the year endedDecember 31, 2019 and 2018, total cash sales from this agreement were$48.1 million and$39.2 million , respectively, which are allocated to travel and other performance obligations. Aircraft Maintenance Deposits. Some of our aircraft and engine master lease agreements provide that we pay maintenance reserves to aircraft lessors to be held as collateral in advance of our performance of major maintenance activities. These lease agreements generally provide that maintenance reserves are reimbursable to us upon completion of the maintenance event. A majority of these maintenance reserve payments are calculated based on a utilization measure, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft until the completion of the maintenance of the aircraft. Maintenance reserve payments are reflected as aircraft maintenance deposits in the accompanying balance sheets. We make certain assumptions to determine the recoverability of maintenance deposits. These assumptions are based on various 44 -------------------------------------------------------------------------------- factors such as the estimated time between the maintenance events and the utilization of the aircraft is estimated before it is returned to the lessor. When it is not probable we will recover amounts currently on deposit with a lessor, such amounts are expensed as supplemental rent. Supplemental rent is made up of maintenance reserves paid to aircraft lessors that are not probable of being reimbursed and probable and estimable return condition obligations. We expensed$4.8 million and$3.4 million of supplemental rent recorded within aircraft rent during 2019 and 2018, respectively. These amounts include$0.5 million and$1.3 million of paid maintenance reserves expensed as supplemental rent during 2019 and 2018, respectively. As ofDecember 31, 2019 and 2018, we had aircraft maintenance deposits of$170.6 million and$245.6 million , respectively, on our balance sheets. Leased Aircraft Return Costs. Our aircraft lease agreements often contain provisions that require us to return aircraft airframes and engines to the lessor in a certain condition or pay an amount to the lessor based on the airframe and engine's actual return condition. Lease return costs include all costs that would be incurred at the return of the aircraft, including costs incurred to repair the airframe and engines to the required condition as stipulated by the lease. Lease return costs are recognized beginning when it is probable that such costs will be incurred and they can be estimated. When costs become both probable and estimable, they are accrued as a component of supplemental rent, through the remaining lease term. When determining the need to accrue lease return costs, there are various factors which need to be considered such as the contractual terms of the lease agreement, current condition of the aircraft, the age of the aircraft at lease expiration, projected number of hours run on the engine at the time of return, and the number of projected cycles run on the airframe at the time of return, among others. In addition, typically near the lease return date, the lessors may allow reserves to be applied as return condition consideration or pass on certain return provisions if they do not align with their current plans to remarket the aircraft. As a result of the different factors listed above, management assesses the need to accrue lease return costs periodically throughout the year or whenever facts and circumstances warrant an assessment. Lease return costs will generally be estimable closer to the end of the lease term but may be estimable earlier in the lease term depending on the contractual terms of the lease agreement and the timing of maintenance events for a particular aircraft. Results of Operations In 2019, we generated operating revenues of$3,830.5 million and operating income of$501.0 million resulting in a 13.1% operating margin and net income of$335.3 million . In 2018, we generated operating revenues of$3,323.0 million and operating income of$350.9 million resulting in a 10.6% operating margin and net income of$155.7 million . Operating revenues increased, year over year, mainly as a result of a 15.1% increase in traffic. Increased operations resulted in higher operating expenses across the board with the exception of special charges, which decreased year over year. As ofDecember 31, 2019 , our cash and cash equivalents was$979.0 million , a decrease of$25.8 million compared to the prior year. Cash and cash equivalents is driven by cash from our operating activities offset by cash used to fund PDPs and capital expenditures. In addition to cash and cash equivalents, as ofDecember 31, 2019 , we had$105.3 million in short-term investment securities. Operating Revenues % change 2019 Year Ended 2019 versus 2018 Year Ended 2018 Operating revenues: Fare (thousands)$ 1,886,855 10.7%$ 1,704,107 Non-fare (thousands) 1,870,750 20.2% 1,555,908 Passenger (thousands) 3,757,605 15.3% 3,260,015 Other (thousands) 72,931 15.7% 63,019
Total operating revenue (thousands)
$ 3,323,034 Total operating revenue per ASM (TRASM) (cents) 9.17 0.8% 9.10 Fare revenue per passenger flight segment $ 54.63 (6.0)% $ 58.14 Non-ticket revenue per passenger flight segment 56.28 1.9% 55.23 Total revenue per passenger flight segment $ 110.91 (2.2)%
$ 113.37
Operating revenues increased by$507.5 million , or 15.3%, to$3,830.5 million in 2019 compared to 2018, primarily due to an increase in traffic of 15.1%, and a slight increase in average yield of 0.2%, year over year. TRASM for 2019 was9.17 cents , an increase of 0.8% compared to 2018. This increase was primarily a result of a 0.2% increase in operating yields and a load factor increase of 50 basis points, year over year. 45 -------------------------------------------------------------------------------- Total revenue per passenger flight segment decreased 2.2% from$113.37 in 2018 to$110.91 in 2019. Fare revenue per passenger flight segment decreased 6.0% and non-ticket revenue per passenger flight segment increased 1.9%. The decrease in fare revenue per passenger flight segment was driven by a shorter average stage length, lower fares and competitive pricing during the period. The increase in non-ticket revenue per passenger flight segment was primarily attributable to higher passenger usage fee, higher seat revenue and higher bag revenue per passenger flight segment, as compared to the prior year. Operating Expenses Since adopting our ULCC model, we have continuously sought to reduce our unit operating costs and have created one of the industry's lowest cost structures inthe United States . The table below presents our unit operating costs (CASM) and year-over-year changes. Year Ended 2019 Change 2019 versus 2018 Year Ended 2018 CASM Per-ASM Change Percent change CASM Operating expenses: Aircraft fuel 2.38¢ (0.19)¢ (7.4)% 2.57¢ Salaries, wages and benefits 2.07 0.10 5.1 1.97 Landing fees and other rentals 0.61 0.02 3.4 0.59 Depreciation and amortization 0.54 0.06 12.5 0.48 Aircraft rent 0.44 (0.05) (10.2) 0.49 Distribution 0.37 (0.01) (2.6) 0.38 Maintenance, materials and repairs 0.34 (0.01) (2.9) 0.35 Loss on disposal of assets 0.04 0.01 NM 0.03 Special charges - (0.24) NM 0.24 Other operating expenses 1.18 0.14 13.5 1.04 Total operating expense CASM 7.97 (0.17) (2.1) 8.14 Adjusted CASM (1) 7.93 0.06 0.8 7.87 Adjusted CASM ex fuel (2) 5.55 0.25 4.7 5.30
(1)Reconciliation of CASM to Adjusted CASM:
Year Ended December 31,
2019 2018
(in millions) Per ASM (in millions) Per ASM
CASM (cents) 7.97 8.14
Less:
Loss on disposal of assets $ 17.4 0.04 $ 9.6 0.03
Special charges 0.7 - 88.9 0.24
Supplemental rent adjustments
related to lease modifications (0.5 ) - - -
Adjusted CASM (cents) 7.93 7.87
(2) Excludes aircraft fuel expense, loss on disposal of assets, special
charges and supplemental rent adjustments related to lease
modifications.
Operating expenses increased by $357.4 million , or 12.0%, in 2019 primarily due
to an increase in operations as reflected by a 14.5% growth in capacity and a
15.1% increase in traffic.
Our adjusted CASM ex fuel for 2019 increased by 4.7% as compared to 2018. The
increase on a per-ASM basis was primarily due to increases in other operating
expense per ASM, salaries, wages and benefits expense per ASM and depreciation
and amortization expense per ASM.
46
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Aircraft fuel expenses includes both into-plane expense (as defined below) and
realized and unrealized net gains or losses from fuel derivatives, if any.
Into-plane fuel expense is defined as the price that we generally pay at the
airport, including taxes and fees. Into-plane fuel prices are affected by the
global oil market, refining costs, transportation taxes and fees, which can vary
by region in the United States and other countries where we operate. Into-plane
fuel expense approximates cash paid to the supplier and does not reflect the
effect of any fuel derivatives. We had no activity related to fuel derivative
instruments during 2019 and 2018.
Aircraft fuel expense increased by 5.8% from $939.3 million in 2018 to $993.5
million in 2019. The increase was due to a 14.2% increase in fuel gallons
consumed primarily driven by a 15.3% increase in block hours. The increase
related to fuel gallons consumed was partially offset by a 7.5% decrease in fuel
price per gallon.
The elements of the changes in aircraft fuel expense are illustrated in the
following table:
Year Ended December 31,
2019 2018
(in thousands, except per
gallon amounts) Percent Change
Fuel gallons consumed 470,939 412,256 14.2 %
Into-plane fuel cost per gallon $ 2.11 $ 2.28 (7.5 )%
Aircraft fuel expense (per statements of operations)
5.8 %
Gulf Coast Jet indexed fuel is the basis for a substantial majority of our fuel
consumption and is impacted by both the price of crude oil as well as increases
or decreases in refining margins associated with the conversion of crude oil to
jet fuel.
Labor costs in 2019 increased by $145.4 million , or 20.2%, compared to 2018. The
increase was primarily driven by a 20.3% increase in our pilot and flight
attendant workforce resulting from an increase to our aircraft fleet of 17
aircraft in 2019. On a per-ASM basis, labor costs increased due to increased
headcount, year over year, as well as higher pay rates received by our pilots in
connection with the collective bargaining agreement that became effective on
March 1, 2018 and which provides for annual increases on each anniversary of the
effective date. In addition, overtime pay and 401(k) expense increased. These
increases were partially offset by lower bonus expense, as compared to the prior
year, due to lower metric performance, year over year.
Landing fees and other rents for 2019 increased by $41.6 million , or 19.4%,
compared to 2018 primarily due to a 17.7% increase in departures. On both a
dollar and per-ASM basis, landing fees and other rents increased due to an
increase in facility rent, landing fees and station baggage rent due to real
estate expansions in existing stations, the addition of new stations and rate
increases at some of our existing stations.
Depreciation and amortization increased by $48.5 million , or 27.5%, compared to
the prior year. The increase in depreciation expense on both a dollar and
per-ASM basis was primarily due to the purchase of 4 new aircraft, 5 previously
leased aircraft, 4 new engines and 2 previously leased engines during 2019.
We account for heavy maintenance under the deferral method. Under the deferral
method, the cost of heavy maintenance is capitalized and amortized as a
component of depreciation and amortization expense in the statements of
operations until the earlier of the next heavy maintenance event or end of the
lease term. The amortization of heavy maintenance costs was $63.4 million and
$41.3 million for the year ended December 31, 2019 and 2018, respectively. The
increase in amortization of heavy maintenance was primarily due to the timing of
maintenance events which resulted in a greater number of maintenance events in
the current year, as compared to the prior year. This increase in heavy
maintenance amortization was the primary driver of the per-ASM increase in
depreciation and amortization expense, year over year. As our fleet continues to
age, we expect that the amount of deferred heavy maintenance events will
increase and will result in an increase in the amortization of those costs. If
heavy maintenance events were amortized within maintenance, materials and
repairs expense in the statements of operations, our maintenance, materials and
repairs expense would have been $206.9 million and $170.4 million for the year
ended December 31, 2019 and 2018, respectively.
Aircraft rent expense in 2019 increased by $5.0 million , or 2.8%, compared to
2018. The increase in aircraft rent expense primarily relates to the delivery of
13 aircraft under operating leases offset by the purchase of 5 aircraft off
lease during 2019 and the purchase of 14 aircraft off lease during the second
quarter of 2018. On a per-ASM basis, aircraft rent expense also decreased due to
a change in the composition of our aircraft fleet between leased aircraft (for
which rent expense is recorded under aircraft rent) and purchased aircraft (for
which depreciation expense is recorded under depreciation and amortization).
47
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During the twelve months ended December 31, 2019 , we have taken delivery
of four new purchased aircraft, which increased capacity but had no effect on
aircraft rent expense, as these assets were purchased and are being depreciated
over their useful life.
Distribution expense increased by $16.8 million , or 12.2%, in 2019, compared to
2018. The increase on a dollar basis was primarily due to increased sales
volume. On a per-ASM basis, distribution costs decreased due to a decrease in
sales from third-party travel agents, which are more expensive than selling
directly through our website or call center.
The following table shows our distribution channel usage:
Year Ended December 31,
2019 2018 Change
Website 66.6 % 67.1 % (0.5 )
Third-party travel agents 26.8 27.1 (0.3 )
Call center 6.6 5.8 0.8
Maintenance, materials and repairs expense increased by $14.5 million , or 11.2%,
in 2019, as compared to 2018 . The increase in maintenance costs on a dollar
basis was due to routine and ongoing maintenance on a growing fleet. On a per
unit-basis, maintenance costs decreased slightly as the timing and mix of
maintenance events resulted in fewer maintenance events, as compared to 2018. We
expect maintenance expense, on a dollar basis, to increase as our fleet
continues to grow and age, resulting in the need for additional and more
frequent repairs over time.
Loss on disposal of assets totaled $17.4 million for the year ended 2019. This
loss consisted of $13.4 million related to the disposal of excess and obsolete
inventory, $3.1 million related to the write-down of certain held-for-sale
assets to fair value less cost to sell and $2.4 million related to the write-off
of certain unrecoverable costs previously capitalized with a project to upgrade
our enterprise accounting software. This project was suspended in the third
quarter of 2019 and we have elected to re-evaluate and pursue the optimal
solution. Refer to "Notes to Financial Statements - 19. Fair Value Measurements"
for information regarding our held-for-sale assets. These losses on disposal
were partially offset by a $1.5 million gain on sale-leaseback transactions for
6 aircraft delivered during the twelve months ended December 31, 2019 . Refer to
"Notes to Financial Statements - 14. Leases and Prepaid Maintenance Deposits"
for information regarding the Company's accounting policy on sale-leaseback
transactions. Loss on disposal of assets for the year ended 2018 primarily
consisted of a $5.2 million loss resulting from the sale of 6 used engines and
$4.4 million related to the disposal of excess and obsolete inventory.
Special charges for the year ended ended 2019 consisted of a $0.7 million
write-off of aircraft related credits resulting from the exchange of credits
negotiated under the new purchase agreement with Airbus executed during the
fourth quarter of 2019. Special charges for the year ended 2018 primarily
consisted of $88.7 million recognized in connection with the pilot collective
bargaining agreement that became effective on March 1, 2018 . The total amount
includes a one-time ratification incentive of $80.2 million , including payroll
taxes, and an $8.5 million adjustment related to other contractual provisions.
For additional information, refer to "Notes to Financial Statements-4. Special
Charges."
Other operating expenses in 2019 increased by $111.9 million , or 29.5%, compared
to 2018 primarily due to an increase in overall operations. As compared to the
prior year period, we increased departures by 17.7% and had 17.8% more passenger
flight segments, which drove increases in variable operating expenses. In
addition, we had higher passenger reaccommodation expense, year over year, due
to multiple storm-related flight disruptions during the second and third
quarters of 2019 as well as other operational challenges. On a per-ASM basis,
the increase in passenger reaccommodation and ground handling expense were the
main drivers of the increase in other operating expense, as compared to the
prior year period.
48
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Other (Income) Expense
Other (income) expense, net decreased from $145.9 million in 2018 to $64.6
million in 2019 primarily due to $90.4 million of interest expense recorded in
2018 within special charges, non-operating related to an aircraft purchase
agreement for the acquisition of 14 A319 aircraft previously operated under
operating leases. The contract was deemed a lease modification which resulted in
a change of classification from operating leases to finance leases. Refer to
"Notes to Financial Statements-4. Special Charges" for further discussion. In
addition, the decrease in other (income) expense was attributed to an increase
in interest income of $6.0 million , as we earned higher interest income on our
cash, cash equivalents and short-term investments due to an increase in our
average cash balance and higher interest rates, as compared to the prior year.
The decrease in special charges, non-operating and increase in interest income
were partially offset by an increase in interest expense of $17.6 million which
primarily consisted of interest related to the financing of purchased aircraft.
As of December 31, 2019 and 2018, we had 64 and 60 purchased aircraft financed
through secured long-term debt arrangements, respectively. Refer to "Notes to
Financial Statements-13. Debt and Other Obligations" for additional information.
Income Taxes
In 2019, our effective tax rate was 23.2% compared to 24.0% in 2018. While we
expect our tax rate to be fairly consistent in the near term, it will tend to
vary depending on recurring items such as the amount of income we earn in each
state and the state tax rate applicable to such income. Discrete items
particular to a given year may also affect our effective tax rates.
49
--------------------------------------------------------------------------------Quarterly Financial Data (unaudited)
Three Months Ended
March 31, 2018 June 30, 2018
(in thousands, except share and per-share amounts)
Operating revenues:
Fare $ 342,695 $ 439,549 $ 476,660 $ 445,203 $ 416,345 $ 515,696 $ 493,376 $ 461,438
Non-fare 346,446 396,801 411,296 401,365 421,720 478,734 479,977 490,319
Total passenger
revenues $ 689,141 $ 836,350 $ 887,956 $ 846,568 $ 838,065 $ 994,430 $ 973,353 $ 951,757
Other revenues 14,997 15,421 16,374 16,227 17,731 18,526 18,615 18,059
Total operating
revenues $ 704,138 $ 851,771 $ 904,330 $ 862,795 $ 855,796 $ 1,012,956 $ 991,968 $ 969,816
Operating income (loss) (38,797 ) 108,521 145,125 136,065 87,804 163,938 124,681 124,624
Net income (loss) $ (44,922 ) $ 11,254 $ 97,480 $ 91,937 $ 56,076 $ 114,501 $ 83,464 $ 81,214
Earnings (loss) per
share:
Basic $ (0.66 ) $ 0.16 $ 1.43 $ 1.35 $ 0.82 $ 1.67 $ 1.22 $ 1.19
Diluted $ (0.66 ) $ 0.16 $ 1.42 $ 1.34 $ 0.82 $ 1.67 $ 1.22 $ 1.18
Weighted average shares
outstanding:
Basic 68,222,396 68,251,241 68,254,165 68,267,372 68,379,707 68,439,261 68,441,899 68,452,317
Diluted 68,222,396 68,310,287 68,502,822 68,687,272 68,515,454 68,620,330 68,544,690 68,553,114
Interim results are not necessarily indicative of the results that may be
expected for other interim periods or for the full year. The air transportation
business is subject to significant seasonal fluctuations as demand is generally
greater in the second and third quarters of each year. The air transportation
business is also volatile and highly affected by economic cycles and trends.
50--------------------------------------------------------------------------------
Three Months Ended
March 31, June 30, September December March 31, June 30, September
2018 2018 30, 2018 31, 2018 2019 2019 30, 2019 December 31, 2019
Other operating statistics
Aircraft at end of period 118 119 121 128 133 135 136 145
Average daily Aircraft
utilization (hours) 12.0 12.6 12.4 11.5 12.2 12.8 12.5 11.7Average stage length (miles) 1,025 1,051 1,033
1,019 1,029 1,004 979 998 Departures 44,982 49,404 50,386 48,073 52,175 58,517 59,314 57,035 Passenger flight segments (thousands) 6,537 7,554 7,856 7,365 7,820 8,953 9,004 8,760 Revenue passenger miles (RPMs) (thousands) 6,813,519 7,961,128 8,241,771 7,606,962 8,133,030 9,157,488 9,057,574 8,897,193 Available seat miles (ASMs) (thousands) 8,408,764 9,515,842 9,579,448 8,998,928 9,829,044 10,775,878 10,686,246 10,491,833 Load factor (%) 81.0 83.7 86.0 84.5 82.7 85.0 84.8 84.8 Fare revenue per passenger flight segment ($) 52.42 58.19 60.67 60.45 53.24 57.60 54.80 52.68 Non-ticket revenue per passenger flight segment ($) 55.29 54.57 54.44 56.70 56.20 55.54 55.37 58.03 Total operating revenue per ASM (TRASM) (cents) 8.37 8.95 9.44 9.59 8.71 9.40 9.28 9.24 CASM (cents) 8.84 7.81 7.93 8.08 7.81 7.88 8.12 8.06 Adjusted CASM (cents) (1) 7.76 7.76 7.92 8.04 7.79 7.86 8.03 8.01 Adjusted CASM ex fuel (cents) (2) 5.33 5.17 5.22 5.49 5.46 5.41 5.66 5.67 Fuel gallons consumed (thousands) 95,003 106,144 109,515 101,595 109,828 122,447 122,072 116,591 Average fuel cost per gallon ($) 2.15 2.32 2.36 2.26 2.09 2.16 2.08 2.10
(1) Reconciliation of CASM to Adjusted CASM:
Three Months Ended
March 31 , June 30 , September 30 , December 31 , March 31 , June 30 , September 30 , December 31,
2018 2018 2018 2018 2019 2019 2019 2019
(in millions) Per ASM (in millions) Per ASM (in millions) Per ASM (in millions) Per ASM (in millions) Per ASM (in millions) Per ASM (in millions) Per ASM (in millions) Per ASM
CASM (cents) 8.84 7.81 7.93 8.08 7.81 7.88 8.12 8.06
Less:
Loss on disposal
of assets 0.8 0.01 4.6 0.05 1.1 0.01 3.0 0.03 1.9 0.02 1.6 0.01 13.4 0.13 0.5 -
Special charges
(credits) 89.2 1.06 0.2 - (0.7 ) (0.01 ) 0.3 - - 0.7 0.01
Supplemental
rent adjustments
related to lease
modifications - - - - - - - - - - (4.3 ) (0.04 ) 3.8 0.04
Adjusted CASM
(cents) 7.76 7.76 7.92 8.04 7.79
7.86 8.03 8.01
(2) Excludes aircraft fuel expense, loss on disposal of assets, special charges (credits) and supplemental rent adjustments related to lease modifications.
51
--------------------------------------------------------------------------------Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash provided by operations
and capital from debt financing. Primary uses of liquidity are for working
capital needs, capital expenditures, aircraft and engine pre-delivery deposit
payments ("PDPs") and debt obligations. Our total cash at December 31, 2019 was
$979.0 million , a decrease of $25.8 million from December 31, 2018 . In addition
to cash and cash equivalents, as of December 31, 2019 , we had $105.3 million in
short-term investment securities.
Currently, one of our largest capital expenditure needs is funding the
acquisition costs of our aircraft. Aircraft are acquired through debt financing,
cash purchases, direct leases or sale leaseback transactions. During the twelve
months ended December 31, 2019 , we purchased 4 aircraft through debt financing
transactions and made $337.8 million in debt payments (principal, interest and
fees) on our outstanding debt obligations. The debt entered into in the current
year has maturity dates ranging from 2030 to 2031 and interest rates ranging
from 2.85% to 3.93%. During 2019, we entered into 6 sale leaseback transactions.
In addition, during the twelve months ended December 31, 2019 , we took delivery
of 7 aircraft financed through direct operating leases, and purchased 5 aircraft
previously financed under operating leases. We also purchased 4 spare engines
through cash purchases and purchased 2 engines previously financed under an
operating lease.
Under our agreements with Airbus for aircraft, and International Aero Engines AG
("IAE") and Pratt & Whitney for engines, we are required to pay PDPs relating to
future deliveries at various times prior to each delivery date. During 2019, we
paid $102.1 million in PDPs, net of refunds, and $10.8 million of capitalized
interest for future deliveries of aircraft and spare engines. As of December 31,
2019 , we had $291.9 million of pre-delivery deposits on flight equipment,
including capitalized interest, on our balance sheet.
During the fourth quarter of 2018, we entered into a revolving credit facility
for up to $160 million secured by the collateral assignment of certain of our
rights under our purchase agreement with Airbus. As of December 31, 2019 ,
collateralized amounts were related to 34 Airbus A320neo aircraft scheduled to
be delivered between January 2020 and December 2021 . The final maturity of the
facility is December 30, 2020 with final payment due in January 2021 . As of
December 31, 2019 , we had drawn $160.0 million on the facility of which $50.0
million is included in current maturities of long-term debt and finance leases
and $110.0 million is included within long-term debt and finance leases, less
current maturities on the Company's balance sheets. The revolving credit
facility bears variable interest based on LIBOR.
As of December 31, 2019 , we had secured debt financing for three aircraft,
scheduled for delivery in 2020. In addition, we secured financing
for 12 aircraft to be leased directly from third-party lessors, scheduled for
delivery in 2020 through 2021. As of December 31, 2019 , we did not have
financing commitments in place for the remaining 132 Airbus firm aircraft
orders, scheduled for delivery through 2027. However, we have signed a financing
letter of agreement with Airbus which provides backstop financing for a majority
of the aircraft included in the A320 NEO Family Purchase Agreement. The
agreement provides a standby credit facility in the form of senior secured
mortgage debt financing. Future aircraft deliveries may be paid in cash, leased
or otherwise financed based on market conditions, our prevailing level of
liquidity, and capital market availability.
As of December 31, 2019 , we were compliant with our credit card processing
agreements, and not subject to any credit card holdbacks. The maximum potential
exposure to cash holdbacks by our credit card processors, based upon advance
ticket sales and $9 Fare Club memberships, as of December 31,
2019 and December 31, 2018 , was $342.3 million and $321.0 million , respectively.
Net Cash Flows Provided By Operating Activities. Operating activities in 2019
provided $409.2 million in cash compared to $506.5 million provided in 2018.
Cash provided by operating activities decreased, year over year, primarily due
to $140.4 million in cash used by other liabilities in 2019 compared to $74.0
million in cash provided by other liabilities in 2018. Also contributing to the
decrease was a $69.8 million income tax refund received during 2018 as compared
to a $21.0 million income tax receivable recorded during 2019. These decreases
in cash were offset by higher net income, year over year.
Operating activities in 2018 provided $506.5 million in cash compared to $425.2
million provided in 2017. The increase is primarily due to a $90.4 million
increase in special charges, non-operating recorded for the twelve months ended
December 31, 2018 . The increase is also due to a $69.8 million income tax refund
during 2018 and an increase in deferred income tax expense. These increases were
partially offset by a decrease in deferred heavy maintenance, net.
Net Cash Flows Used In Investing Activities. During 2019, investing
activities used $314.8 million , compared to $783.7 million used in 2018. This
decrease was mainly driven by a decrease in the purchase of property and
equipment, year over year, as well as a decrease in PDPs paid, net of refunds,
driven by timing of future aircraft deliveries.
52
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During 2018, investing activities used $783.7 million , compared to $792.0
million used in 2017. The decrease was mainly driven by fewer purchases of
property and equipment, year over year, as well as increased proceeds received
from the sale of property and equipment. The decrease was partially offset by
paid PDPs, net of refunds, driven by timing of future aircraft deliveries.
Net Cash Used In/Provided By Financing Activities. During 2019, financing
activities used $120.2 million . We received $225.9 million primarily related to
the debt financing of 4 aircraft delivered during 2019. In addition, we paid
$246.8 million in debt principal payment obligations and $96.5 million in
finance lease obligations. The payments on finance lease obligations are
primarily related to an aircraft purchase agreement for the purchase of four
A320ceo aircraft which were previously financed under operating leases. Refer to
"Notes to Financial Statements - 14. Leases and Prepaid Maintenance Deposits"
for more information on these four aircraft.
During 2018, financing activities provided $481.1 million . We received $832.1
million in connection with the 2015-1C and 2017-1C EETCs and the debt financing
of 14 aircraft delivered during 2018. In addition, we paid $137.3 million in
debt principal payment obligations and $205.7 million in finance lease
obligations. The payments on finance lease obligations are primarily related to
an aircraft purchase agreement for the purchase of 14 A319 aircraft which we
previously financed under operating leases. For additional information, refer to
"Notes to Financial Statements - 4. Special Charges."
Commitments and Contractual Obligations
Our contractual purchase commitments consist primarily of aircraft and engine
acquisitions through manufacturers and aircraft leasing companies. As of
December 31, 2019 , our firm aircraft orders consisted of 135 A320 family
aircraft with Airbus, including A319neos, A320neos and A321neos, with deliveries
expected through 2027. In addition, we had 12 direct operating leases for
A320neos with third-party lessors, with deliveries expected through 2021.
On December 20, 2019 , we entered into an A320 NEO Family Purchase Agreement with
Airbus for the purchase of 100 new Airbus A320neo family aircraft, with options
to purchase up to 50 additional aircraft. This agreement includes a mix of
Airbus A319neo, A320neo and A321neo aircraft with such aircraft scheduled for
delivery through 2027. We also have one spare engine order for a V2500 SelectTwo
engine with IAE and four spare engine orders for PurePower PW 1100G-JM engines
with Pratt & Whitney . Spare engines are scheduled for delivery from 2020 through
2023. As of December 31, 2019 , committed expenditures for these aircraft and
spare engines, including estimated amounts for contractual price escalations and
aircraft PDPs, are expected to be $988.0 million in 2020, $744.8 million in
2021, $123.7 million in 2022, $491.6 million in 2023, $1,002.5 million in 2024,
and $3,605.4 million in 2025 and beyond. During the third quarter of 2019, the
United States announced its decision to levy tariffs on certain imports from the
European Union , including commercial aircraft and related parts. These tariffs
include aircraft and other parts that we are already contractually obligated to
purchase including those reflected above. The imposition of these tariffs may
substantially increase the cost of new Airbus aircraft and parts required to
service our Airbus fleet. For further discussion on this topic, please refer to
"Risk Factors - Risks Related to Our Business - Any tariffs imposed on
commercial aircraft and related parts imported from outside the United States
may have a material adverse effect on our fleet, business, financial condition
and our results of operations."
We have significant obligations for aircraft and spare engines as 52 of our
aircraft are financed under operating leases, 2 of our aircraft are financed
under finance leases and 9 of our spare engines are financed under operating
leases. These leases expire between 2020 and 2037. Aircraft rent payments were
$181.0 million and $214.0 million for 2019 and 2018, respectively.
We have contractual obligations and commitments primarily with regard to future
purchases of aircraft and engines, payment of debt, and lease arrangements. The
following table discloses aggregate information about our contractual
obligations as of December 31, 2019 and the periods in which payments are due
(in millions):
2025 and
Total 2020 2021 - 2022 2023 - 2024 beyond
Long-term debt (1) $ 2,214 $ 222 $ 442 $ 506 $ 1,044
Interest and fee commitments (2) 431 78 136 99 118
Finance and operating lease
obligations 2,042 242 394 346 1,060
Flight equipment purchase
obligations 6,955 988 868 1,494 3,605
Other (3) 134 22 34 28 50
Total future payments on
contractual obligations $ 11,776 $ 1,552 $ 1,874 $ 2,473 $ 5,877
53--------------------------------------------------------------------------------
(1) Includes principal only associated with senior term loans, fixed-rate
loans, Class A, Class B, and Class
A, Class B, and Class
facility. Refer to "Notes to the Financial Statements-13. Debt and Other
Obligations."
(2) Related to senior term loans, fixed-rate loans, and Class A, Class B, and
Class
Series 2017-1 EETCs. Includes interest accrued as of
related to our variable-rate revolving credit facility.
(3) Primarily related to our reservation system and other miscellaneous
subscriptions and services. Refer to "Notes to the Financial
Statements-18. Commitments and Contingencies."
Some of our master lease agreements require that we pay maintenance reserves to
aircraft lessors to be held as collateral in advance of our required performance
of major maintenance activities. Some maintenance reserve payments are fixed
contractual amounts, while others are based on utilization.
As of December 31, 2019 , we had secured debt financing for three aircraft to be
delivered in 2020. In addition, as of December 31, 2019 , we had secured
financing for 12 aircraft to be leased directly from third-party lessors,
scheduled for delivery in 2020 through 2021. We did not have financing
commitments in place for the remaining 132 Airbus aircraft currently on firm
order, which are scheduled for delivery through 2027. However, we have signed a
financing letter of agreement with Airbus which provides backstop financing for
a majority of the aircraft included in the A320 NEO Family Purchase Agreement.
The agreement provides a standby credit facility in the form of senior secured
mortgage debt financing.
As of December 31, 2019 , principal and interest commitments related to the
future secured debt financing of 3 aircraft to be delivered in 2020 are
approximately $9.6 million in 2020, $12.9 million in 2021, $13.0 million in
2022, $13.0 million in 2023, $13.1 million in 2024, and $83.3 million in 2025
and beyond. As of December 31, 2019 , aircraft rent commitments for future
aircraft deliveries to be financed under direct leases from third-party lessors
are expected to be approximately $6.0 million in 2020, $34.9 million in 2021,
$44.1 million in 2022, $44.1 million in 2023, $44.1 million in 2024, and $356.1
million in 2025 and beyond. These future commitments are not included in the
table above.
Off-Balance Sheet Arrangements
During the fourth quarter of 2018, we entered into a revolving credit facility
for up to $160 million secured by the collateral assignment of certain of our
rights under our agreements with Airbus. As of December 31, 2019 , collateralized
amounts were related to 34 Airbus A320neo aircraft scheduled to be delivered
between January 2020 and December 2021 . The final maturity of the facility is
December 30, 2020 with final payment due in January 2021 . As of December 31,
2019 , we had drawn $160.0 million on the facility which is included in current
maturities of long-term debt and finance leases and long-term debt and finance
leases, less current maturities on our balance sheet.
As of December 31, 2019 , we had lines of credit related to corporate credit
cards of $33.6 million from which we had drawn $4.6 million .
As of December 31, 2019 , we had lines of credit with counterparties for both
physical fuel delivery and derivatives in the amount of $41.5 million . As of
December 31, 2019 , we had drawn $25.3 million on these lines of credit for
physical fuel delivery. We are required to post collateral for any excess above
the lines of credit if the derivatives are in a net liability position and make
periodic payments in order to maintain an adequate undrawn portion for physical
fuel delivery. As of December 31, 2019 , we did not hold any derivatives.
As of December 31, 2019 , we had $9.2 million in uncollateralized surety bonds
and a $35.0 million unsecured standby letter of credit facility, representing an
off balance-sheet commitment, of which $23.3 million had been drawn upon for
issued letters of credit.
54
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GLOSSARY OF AIRLINE TERMS
Set forth below is a glossary of industry terms:
"Adjusted CASM" means operating expenses, excluding unrealized gains or losses
related to fuel derivative contracts, out of period fuel federal excise tax,
loss on disposal of assets, special charges and supplemental rent adjustments
related to lease modifications, divided by ASMs.
"Adjusted CASM ex fuel" means operating expenses excluding aircraft fuel
expense, loss on disposal of assets, special charges and supplemental rent
adjustments related to lease modifications, divided by ASMs.
"AFA-CWA" means the Association of Flight Attendants-CWA .
"Air traffic liability" or "ATL" means the value of tickets sold in advance of
travel.
"ALPA" means the Air Line Pilots Association , International.
"ASIF" means an Aviation Security Infrastructure Fee assessed by the TSA on each
airline.
"Available seat miles" or "ASMs" means the number of seats available for
passengers multiplied by the number of miles the seats are flown, also referred
to as "capacity."
"Average aircraft" means the average number of aircraft in our fleet as
calculated on a daily basis.
"Average daily aircraft utilization" means block hours divided by number of days
in the period divided by average aircraft.
"Average fuel cost per gallon" means total aircraft fuel expense divided by the
total number of fuel gallons consumed.
"Average stage length" represents the average number of miles flown per flight.
"Average yield" means average operating revenue earned per RPM, calculated as
total revenue divided by RPMs, also referred to as "passenger yield."
"Block hours" means the number of hours during which the aircraft is in revenue
service, measured from the time of gate departure before take-off until the time
of gate arrival at the destination.
"CASM" or "unit costs" means operating expenses divided by ASMs.
"CBA" means a collective bargaining agreement.
"CBP" means United States Customs and Border Protection.
"DOT" means the
"EPA" means the
"EETC" means enhanced equipment trust certificate.
"FAA" means theUnited States Federal Aviation Administration . "Fare revenue per passenger flight segment" means total fare passenger revenue divided by passenger flight segments. "FCC" means theUnited States Federal Communications Commission . "FLL Airport " means theFort Lauderdale Hollywood International Airport . "GDS" means Global Distribution System (e.g., Amadeus, Galileo, Sabre and Worldspan). "IAMAW" means theInternational Association of Machinists and Aerospace Workers . "Into-plane fuel cost per gallon" means into-plane fuel expense divided by number of fuel gallons consumed. "Into-plane fuel expense" represents the cost of jet fuel and certain other charges such as fuel taxes and oil. 55 -------------------------------------------------------------------------------- "Load factor" means the percentage of aircraft seats actually occupied on a flight (RPMs divided by ASMs). "NMB" means theNational Mediation Board . "Non-ticket revenue" means total non-fare passenger revenue and other revenue. "Non-ticket revenue per passenger flight segment" means total non-fare passenger revenue and other revenue divided by passenger flight segments. "OTA" meansOnline Travel Agent (e.g.,Orbitz and Travelocity). "PAFCA" means theProfessional Airline Flight Control Association . "Passenger flight segments" means the total number of passengers flown on all flight segments. "PDP" means pre-delivery deposit payment. "Revenue passenger mile" or "RPM" means one revenue passenger transported one mile. RPMs equals revenue passengers multiplied by miles flown, also referred to as "traffic." "RLA" means the United States Railway Labor Act. "Total operating revenue per ASM," "TRASM" or "unit revenue" means operating revenue divided by ASMs. "TWU" means theTransport Workers Union of America . "TSA" means theUnited States Transportation Security Administration . "ULCC" means "ultra low-cost carrier." 56
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